If you are one of those risk-averse investors, chances are that your savings would be locked into various fixed and recurring deposits.
And yet, have the typical safe modes such as deposits offered you the protection you seek? Not in the ‘real’ sense suggests this data from JP Morgan Asset Management. Across the Asian countries mentioned below, deposit rates managed to beat inflation and leave you with some surplus (returns mentioned below are deposit rates post yearly inflation) until 2007.
However, since the start of the economic slowdown in 2008, most Asian countries have seen either lower interest rates and low growth or high inflation. As a result, investors in deposits have ‘negative real returns’. For India, rising prices were higher than deposit rates by 1.9 percentage points. Simply put, the interest income from deposits has not helped you keep pace with rising cost of goods. Net result, you would have had to dig in to your capital/savings to meet it.
Now, in a way, that too amounts to erosion of capital does it not? That means, while you may not lose your capital through risky investments, you lose it to a lethal force called inflation.
And yet, the deposit-investing culture has hardly seen a shift. According to the same report by JP Morgan Asset Management, in 2001, 67 per cent of investors in emerging Asia preferred deposits over other risky assets. This proportion did not change as late as 2011.
But what choice do you have to combat this? Not much but here are a few suggestions:
If you are at the fag end of your income earning career or are retired, ensure that you diversify your investments across a few products. Of course, you do not have to compromise on the quantum of risk you can take (or cannot take). If you want only debt products, look beyond bank deposits. There would be times when top-rated bonds and debentures come up with good rates. Be on the look-out and lock into them. Keep a demat account ready for this purpose as most bonds require you to have a demat account. Explore corporate deposits in credit worthy companies that are rated. Avoid going for unrated companies unless you have knowledge on the financials of such companies.
Ensure that instruments have high credit rating such as AAA before you invest either in bonds or deposits. Look for debt mutual funds that have delivered not less than 7 per cent annually in the past and have at least a three-year record. Use systematic transfer plan in these options if you wish to get a steady payout.
Grin and bear
Even with all this, there is no guarantee that you will successfully combat inflation. The fact is that if you had a sufficiently large corpus, you can simply park your money in instruments that earn 6-7 per cent and still not worry too much about losing a bit of your capital.
But such a corpus can be built only if you invest across asset classes spanning equities, debt gold and real estate early on in life. While some of them may earn mediocre returns, they will protect capital. The rest, will, hopefully, take risks and still deliver in the long term. Hence, if you are still in your early earning years, you have very little choice in the current inflation scenario, but to take on some risks.
Starting early, investing regularly, reviewing and rebalancing periodically and investing for the long term could be the only way out to take on the devil called inflation. You can always move a good chunk of your money to deposits, when your need for fixed income generation turns high post retirement.